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Bank Lending Is Up Sharply, but Is It Going to the 'Real' Economy?

November 20, 1998|TOM PETRUNO

Somebody's borrowing a lot of money from U.S. banks, belying the idea of a credit crunch.

But is the money going to the borrowers who need it most?

Federal Reserve data show that total credit extended by commercial banks has jumped sharply since late summer, even amid rising concerns that global markets' turmoil would cause banks to turn much more conservative in their lending.

Total bank credit outstanding has leaped to $4.5 trillion from $4.3 trillion in late July, seasonally adjusted. The total has risen 5% in about three months, versus growth of 2.9% in the five months through late July.

A more narrow category of bank loans--commercial and industrial loans, a key source of business credit--also has risen sharply in recent weeks, jumping $40 billion, to $950 billion, since mid August, Fed data show.

"Evidently, a lot of borrowers are still welcome" at banks, said Paul Kasriel, economist at Northern Trust in Chicago.

"We hear that banks are getting more selective [in their loan terms], but people must be willing to meet" those terms if credit is growing so quickly, Kasriel said.

Indeed, while Fed officials themselves have worried aloud about the prospect of a credit crunch--a key reason why the central bank has reduced its main short-term interest rate three times since Sept. 29--many bankers have insisted that it's business as usual for them and their borrowers.

But if that's the case, the Fed's decision to grease the wheels with easier money deserves a good portion of the credit, some analysts say.

"The Fed acted preemptively and prevented a credit crunch," said Gordon Richards, economist at the National Assn. of Manufacturers in Washington.

Yet the seeming surge in bank loan growth may be misleading, some experts say.

A big question is whether many of the borrowers that have turned to banks have done so only because they couldn't raise money in stock and bond markets in recent months, as jittery investors, until recently, basically balked at buying new stock or bond issues.

While even higher-quality companies were shut out of global capital markets amid the worst of the investor confidence crisis in September and October, "those borrowers do have a safety valve--they can go to banks" and tap existing credit lines, said Gary Schlossberg, economist at Wells Fargo in San Francisco.

Conceivably, those higher-quality borrowers were tapping bank credit that ordinarily would have gone to riskier bank borrowers--who might have been turned away, or had their loan terms tightened, analysts note.

Charles Clough, chief investment strategist at Merrill Lynch & Co. in New York and a pessimist on the economy's outlook, also has a downbeat view of the growth in bank credit in recent months.

He argues that the bank credit figure has been inflated by "bank purchases of non-Treasury debt and bank lending for the purposes of securities purchases"--basically, credit extended not to operating companies that need money, but to market speculators.

That form of credit has been growing "in excess of a 125% annual rate since late August," Clough says.

The upshot, he says, is that "very little bank credit is going to the real economy."

Other analysts say Clough's view is too dour. Kasriel notes that the commercial and industrial loan credit category often surges when companies are building inventories of goods to meet demand. That loan figure has continued to grow in the first five weeks of this quarter, meaning "it's consistent with the strong [economic] growth we saw in the third quarter," which surprised many economists.

"That may be telling us something about the fourth quarter as well"--meaning that U.S. growth remains healthy, Kasriel says.

John Lonski, economist at Moody's Investors Service in New York, says that even if banks are putting money into bonds and lending for securities purchases, the overall credit figure still indicates that "banks have not shied away from extending credit to private-sector borrowers."

What's more, he notes, bank credit has continued to grow in recent weeks, even as more borrowers have been able to tap the bond markets again.

"I think that if you look at [bond issuance] and bank lending growth, the conclusion you have to make is that liquidity is returning" to the financial system, Lonski says. And that can't be a bad thing.


Tom Petruno can be reached by e-mail at


Banks to the Rescue?

Credit outstanding from U.S. commercial banks has surged since early-September. But some analysts say the borrowers may not be the businesses that need money most. Total bank credit outstanding, in billions, mid-week figures:

Nov. 4: $4.51 trillion

Bank credit includes loans, leases and securities

Source: Federal Reserve Bank of St. Louis

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